CEO Article: Traditional Lending vs. Online Lending Marketplaces

While driving to a bank board meeting earlier this month, I listened to a number of repeat advertising spots for quick and easy business and personal loans by three different advertisers in the span of my three hour drive. Later that day in the board meeting, we discussed our 2016 budget and plans for loan growth.

The usual discussion unfolded and was centered on local bank and credit union competition. I brought up the fact that on my way out to the meeting, based on the amount of advertising that I heard, we need to start paying attention to the emerging online business and personal loan marketplace. While everyone acknowledged that this marketplace is growing, I don’t believe anyone was overly concerned.  After all, community banks and credit unions offer personal service and relationship banking that the online marketplaces can’t match.

While I agree with that, we all need to pay attention to our lending delivery model to ensure it keeps pace with the relationship advantage that community institutions have. I want to give you an example of my experience with obtaining a business line of credit to make my point.

Before I do, who are some of the online business and personal loan companies that I am referencing? I will name just a few and a little about each.

  • LendVantage – Their spokesperson is Larry King. Business Loans for $250,000 – Connects to funding partners with an online, no fee application promising approval and funding in 7 minutes to 24 hours.
  • OnDeck – Their mission statement is ‘Powering the Growth of Small Business Through Lending and Technology Innovation’. They offer business term loans of up to $250,000 and business lines of credits up to $20,000. Online application with a decision in minutes and funding in as fast as 1 business day. $3 Billion in small business loans delivered in the U.S. since 2007.
  • Kabbage – Their advertising spokesperson is Lori Greiner. Lori is the QVC queen that is more famously known for her role on Shark Tank. Kabbage will lend up to $250,000 for business loans. They offer an online automated application process that takes minutes to complete with instant decisions based on real time business data. They compare their lending model to the traditional business lending model that requires multiple pages of documents, hours to apply and two weeks or longer to receive a decision.

There are several others in the online lending marketplaces for business and consumer loans such as Prosper, Lendio, LendingClub and so forth. They all have one thing in common: they all use cutting edge technology to simplify the application, qualification and funding process compared to traditional lending.

However, community financial institutions have that ‘relationship’ advantage to overcome the impersonal online lenders, right? Not so fast. Let me give you an example of an actual experience I had earlier this year. Our company is fortunate to have no bank or secured debt, combined with solid cash and working capital and growing earnings annually. I thought it would be prudent to obtain a traditional bank line of credit commitment for back up or special project financing should the need arise. I called a community banker that I had known for years and with whom I had a strong relationship.  I thought the quality of our loan request was a slam dunk, if there ever was one. Strong collateral, working capital, cash flow and earnings – all the things that bankers love. After 4 weeks, the loan request had not received loan committee approval. I entertained dozens of questions willingly over the first 2 weeks while the credit analyst worked on our numbers. Then another 2 weeks to prepare the loan request and numbers into a package for loan committee approval. The committee that needed to approve or loan meant another week to get on the agenda for approval. 4 weeks into this process, I withdrew our application and went elsewhere and was approved in 2 weeks at another financial institution.

I wasn’t in a hurry for the funds as it was simply a back up LOC commitment. I withdrew to make a point that their lending delivery process was horrible.  The original lender that could not deliver a simple loan approval in a month’s worth of effort had a very disorganized and bureaucratic old school approach to business lending, in my professional opinion. The irony is their billboards all over town promoting their business lending with fast approvals. Marketing and reality sometimes do not align. The institution that approved our loan in 2 weeks was still problematic. The timeline needs to be shorted even further if community financial institution desire to remain viable and competitive for business loans.

The point of my story is not that you all need to have an online business application with instant decisions and funding to compete for the majority of business loans out there. Relationships do matter, but what good are they if it takes 2 to 4 weeks to get a loan approval and funding? We all have to do better by utilizing credit workflow technology to its fullest capacity like our Square 1 Credit Suite.  This, when combined with streamlined internal policies and procedures for decision making, can significantly shorten the time to decision and funding. I think most business loan applicants would be satisfied with a decision within a week or less of application followed by funding in 10 business days or less, while working with a banker in their community.  That is my humble opinion.

All of this is something to think about as you begin planning for next year and the loan growth you hope to achieve.

Duane Lankard
Suntell CEO

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